P&Ls show loss

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Hello!  My husband and I are hopeful future innkeepers.  We have been reading and learning everything we can - including tons of your forum topics.  You have made me nervous but not scared me away.  We know we still have so much to learn.  I am hoping for some help.  We have received the occupancy ratings and the P&Ls for a B&B we are interested in.  I completely get that for tax reasons showing a profit is bad, but I am confused with what reality it.  I know ultimately we need to hire a CPA for a better look, but I don't want to waste money if this is just a no go.  When your B&B is for sell should you be showing a loss, not just one year consistent loss every year?  Is this just a paper game or if the P&Ls are showing a loss is the B&B really losing money each year.  Thanks in advance for your answers and hopefully for not laughing to hard at my question.  JackieG

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Disclosure: I have not read through all the responses and I have also never purchased a B&B.

BUT - as a professional bookkeeper, I can tell you that a P&L can say anything you want it to say.  It's the official tax return that you really want to see.  I have had clients alter the figures on my P&Ls to sell their business and that P&L ended up being very different from the tax return (I refused to participate & that's why they are no longer a client).

Honestly, I would not trust any P&L that was just handed to you.  I would recommend an Audited Financial Statement from a CPA.  But, also keep in mind, that anyone can put a cover letter or cover page on it to make it appear to be an official Financial Statement.  

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I just wanted to thank you all again.  We are plugging away still and asking good questions (I hope) using all your advice.

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yes

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We had to plead and beg for info, and this was using a B&B Broker who will remain nameless, and who you never see me post or promote on this forum. As the same said broker also allowed another innmate on this forum to be sold a bag of goods.

In other words, the numbers were fudged, and the broker said he has nothing to do with verifying any numbers. He did not care, even though he said he represented both THE BUYER and the SELLER. I won't recommend that "Team" even when they are at all the PAII conferences. cool

In my best old fogey grandpa voice I proclaim "LET THAT BE A LESSON TO YOU!"

 

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I guess this is why we are called a lifestyle B&B. We are not a revenue raker, that is for sure. And yet my day to day adventures are so exciting!

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05/22/2008

Yep...lifestyle. We take it in and we put it right back into the B & B and related expenses. Poster never said what the size of the B & B was. If a 2 or 3 room...there is no profit. But if it is a 10 room inn in a prime location,  I would expect to see a profit show up sometime.

gillumhouse's picture
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I might manage a profit if I did not keep plowing everything back in to marketing or improvements. Hoping the Elopement Package will make up my shortfall to replace my roof. We will see.....

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So let me ask you this, seeing a P&L with a loss would make you turn the other way?

If I said "This inn has revenue of $150,000 per annum" approx, and you saw the P&L showing a loss, you would immediately figure it was a dog of a business? 

What if they have a high mortgage, or what if they have no mortgage? Do you take this into account?

Kay Nein's picture
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Keep in mind, too, that a mortgage does not show up on a P&L.  That is a figure that shows on the Balance Sheet as a reduced liability. The only portion of the mortgage reflected on the P&L is the interest expense.

Madeleine's picture
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And yet, the owners do not have to tell you WHY the expenses are so high. Huge mortgage? They don't have to say. Lots of employees? They don't have to say. Wicked high breakfast costs? Ditto.

All of those things are based on the owners' personal situation. Every owner is different.

Property taxes are a different thing, you can find that out on your own if you have to.

We had no idea what the PO's expenses were in the area of mortgage (very low we found out later), employees, breakfast and other 'perishable' areas like expenditures on linens, etc. We were told that our situation would be different and basing the purchase on the PO's situation didn't make sense. Could WE afford it based on gross revenue and our 'expected' expenditures?

What I will say and do say whenever I get the chance is that is costs a LOT more than you think it will. (All new towels? $1000. All new sheets? Another $1000. Stuff you don't think of when all you usually buy is 2 sets of anything.)

'You' figure breakfast will cost $x/guest or /room and then you find out that groceries are double in your location than where you live now. And nothing is really 'good' as it has to be shipped so far in the winter. 'You' figure you'll do all the maintenance and then you realize you really can't be fixing a clogged drain at 8 AM when everyone is expecting to eat. 'You' (me) figure you'll handle all the landscaping until you realize you really don't want to be outside digging in the blazing sun and you hire someone to do it for you. But, that doesn't mean the next owner will do it the same way.

AND, will the PO's be taking away all the durable goods? The furniture, the plates, the cookware?

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OnTheShore's picture
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"f I said "This inn has revenue of $150,000 per annum" approx, and you saw the P&L showing a loss, you would immediately figure it was a dog of a business?"

I wouldn't, not on just that information. $150K revenue doesn't seem too bad (at least from my perspective), so you really have to study the expense side to understand why they are too high. Yes, look for opportunities to increase revenues, but make sure you understand the expenses and can control costs!

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Joey Camb's picture
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this is what kind of baffles me about the situation in the USA - if i was selling as a business I would expect to show at least 3 years of accounts broken down in to various sections ie mortgage, wages (how many staff, how much paid and how much paid as owners salery), maintenance, tax, food etc - and thats just to start.

For serious buyers who had signed a non disclosure might even expect to show what we call our detailed accounts which get right down to how much spent on everything ie beds, towels and so on not just the final yearly total figures.

You also have to remember that everything is on a bigger scale ie I am 11 bedrooms which means 21 place setting for breakfast which means at least 30 place settings of cutlery, crockey and so on, 11 bedrooms of sheets at least 3 sets each (if I did my own) and so on everything needs to be bought in triplicate and replaced a lot more often ie furniture and lamps as they take a beating from guests.

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Madeleine's picture
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Even when we had made a deposit on our place and were in the process of doing 'due diligence' we did not get the info you mention. We were consistently told, no matter where we looked, that expenses are based on how you run the biz. If you let the towels get threadbare then your expenses will be x. Someone else might replace them and their expenses would be y. But that was our decision.

And there's another thing...to this day I have no idea what 'due diligence' is. How do you find out what you don't know you don't know???

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Madeleine wrote:

Even when we had made a deposit on our place and were in the process of doing 'due diligence' we did not get the info you mention. We were consistently told, no matter where we looked, that expenses are based on how you run the biz. If you let the towels get threadbare then your expenses will be x. Someone else might replace them and their expenses would be y. But that was our decision.

And there's another thing...to this day I have no idea what 'due diligence' is. How do you find out what you don't know you don't know???

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Maddy, if they were selling me the business as a business, I would insist on seeing their paperwork. I wouldn't put down even a deposit unless they were showing me their books.

Now, if I was buying the house, that's a totally different story. Which might be why we sold the last B&B as a house and gifted them the B&B. They didn't need to see any paperwork, the house was at a reasonable value and they weren't buying the B&B or the name.

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Madeleine's picture
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Not saying we didn't get any details but employees, food costs, expenditures on linens, etc every broker told us were not going to be given as those costs depended on how we ran the biz.

It would have been nice to know some of those things as a baseline. We were told a lot of stuff that wasn't true. The owners did all the work for one. Even tho we met the housekeeper! Neighbors came by and told us about all the people who worked here at various times.

One place we were interested in gave us 10 single-spaced pages of their check register and told us to figure it out for ourselves! (We did and realized they were paying out thousands more than they were bringing in so we lowballed the offer.)

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In the case of a sale of a house around here, you are 100% responsible for up to 20 years if you are found to lie on anything.

Madeleine's picture
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I think that may go state by state here. I know we had to sign a statement on our house in VT when we sold it that there wasn't any lead paint, radon, mold. We had to check that we didn't know if there were any of those things because we'd never checked or had the house tested.

Here we did the radon test ourselves because the entire state shows up red on the radon map. We had a radon abatement system put in. The guys who installed it told us they had done the testing here the year before we bought. The owners told us it had never been done. Sigh.

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Here it's pyrite. You sometimes have to drill a hole down to have it tested that they didn't use pyrite as part of the backfill. But then I have never owned a house young enough to worry about that.

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I think this was preliminary Cambs. Innkeepers aren't going to give away all their detailed information to someone who just calls, stops by or emails. We have had people DROP in and expect this stuff! 

We are for sale and I have every last bit of info broken down, even marketing!

This thread has depressed the heck out of me. And in fact I just booked a week away in July because of it. Life is too short, especially when there is not a whole lot we can do about these things. Most B&B's are lifestyle sustainable businesses, unless they are a large inn. For us, we COULD make keep money if we deferred all maintenance. But that ain't gonna happen! enlightened

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not that Im selling = but due to all the renovations we made a small loss last year but Im definately not stopping! want to get at least 2 more bathrooms done this year at least! and hopefully all the stair carpet as well! (4 flights and 2 staircases and all new underlay) the PO's we all we always had 20,000 in the bank - was so tempted to say cos you never spent anything on renovations in 5 years!!!!!

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Harborfields wrote:

"f I said "This inn has revenue of $150,000 per annum" approx, and you saw the P&L showing a loss, you would immediately figure it was a dog of a business?"

I wouldn't, not on just that information. $150K revenue doesn't seem too bad (at least from my perspective), so you really have to study the expense side to understand why they are too high. Yes, look for opportunities to increase revenues, but make sure you understand the expenses and can control costs!

Or as my form here says on my desk for our town business license "Gross Revenue"

Should you be looking at gross revenue, as expenses vary per person and situation per inn. Do I hire everything out and deduct all expenses? Do I never hire anything, and not deduct anything? Do I have tax credits? Do I have renovations? Do I have an outside income?  Do I pay myself an income from the business? Do I have depreciation costs? Do I have high personal or property taxes? Do I deduct health care premiums being self employed?

 

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Will your interest expense be as high as theirs? Or higher? If you can find out the reason and it is fixable those can make the best deals. 

Also be aware of the fact that your banker might not be keen on loaning on something that is losing money. 

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05/11/2013

Thank you all for the information!  You gave me lots of places to look and lots of questions to ask.  Madeleine, you are absolutely right we don't want to purchase it if they are losing money, I just don't understand the P&Ls enough yet to know rather that is the case, but I fear it is. 

gillumhouse's picture
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  • Is it a "seasonal" area
  • were the innkeepers burning out? as in taking days off to keep sane
  • was there illness causing closing for periods of time
  • was it open but empty
  • how much marketing did they do
  • what was their target market (did they KNOW their target market?)
  • Do you see where you could improve occupancy/revenue
  • Can you get it for a price (taking the 3 immediately previous comments into consideration) that will allow future profit

Examples - 2011 I closed the month of June to go to Europe on a chance of a lifetime (would affect P & L). Hubs has had several medical events that affected P & L AND GOD in his wisdom kept potential guests away when we were dealing with family members dying as we cared for them. There can be many good reasons (meaning things you can do to turn it around) as well as bad reasons (not a good place to have a B & B or even the house is not suited to be one - we looked at many that were not conducive - as well as just crappy innkeepers, great people, just not grab your ankles innkeepers).

Madeleine's picture
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You'll need to understand what your running the biz will look like, too. Will you have a big loan? More/less help? Higher insurance or property tax? More renovations? Etc.

An example - we budgeted $10k/year for maintenance (way above the previous owners) and we go over that every year.

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Depreciation and also renovations (which they may be doing to sell the place) can be a factor.

I understand what you are saying Jackie, as the one benefit of owning a B&B is being able to deduct as much as possible, and for us here, we do it! I remember our accountant saying "Errrr not so sure the IRS will appreciate deducting a vehicle as an expense for the business to go grocery shopping..."  Well dang it, that is what I do! haha

 

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I deduct the trips only.

Generic's picture
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Are they showing a loss because of CCA? Salaries? Why is there a loss? And is it a loss that will shield future income?

A loss because of CCA is neutral, basically it's the goods in the house and you are getting your money back that was spent. In some cases it may mean that you are building value in the home and getting to write it off, as others can't.

Salaries are judgmental, is it simply a way of paying themselves or are they paying others to do the work you will do?

 

Madeleine's picture
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Not sure why you want to buy something that is actively losing money...

OnTheShore's picture
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You may want to look at a series of annual balance sheets to see how the assets and liabilities are changing over time which may give clues into P&Ls showing consistent losses, or where the money is coming from (or going to).

OnTheShore's picture
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One of the factors that will contribute to a loss "on the books" but without necessarily creating a loss from a cash flow/operating perspective is the Depreciation expense. Of course somebody at sometime had to invest real cash in order for there to be a depreciation expense...

Another factor to look at is salaries and wages -- are the owners/operators of the B&B drawing a salary or wage that results in the business entity showing a loss, while they are still making money?

You really need to study the numbers and ask a lot of questions about how they are accounting for things in order to understand P&L's that are showing consistent losses. If it is a true operating loss, somebody has got to be putting money in from another source in order to keep the thing going.

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